China’s high-flying technology board completes worst week since March amid crackdown as analysts recommend large-cap stocks to avoid regulatory risks

Shenzhen's technology board posted its worst weekly performance in six months, with analysts recommending switching to big-cap stocks with cheaper valuation amid a crackdown on speculative trading of smaller companies.

The ChiNext index of start-up companies tumbled 7.2 per cent from September 7 for the steepest five-day loss since March. That compared with a 2.8 per cent drop in the benchmark Shanghai Composite Index, a gauge represented by some of the nation's biggest companies.

Sentiment on the technology-heavy board soured as soon as the Shenzhen Stock Exchange took measures to rein in the speculative bets on some ChiNext-listed companies. Regulators halted trading of Xinjiang Tianshan Animal Husbandry Bio-engineering and other two companies, whose shares have surged in recent weeks for unexplained reasons, adding that they will keep monitoring unusual share price movements.

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"The speculative mood is receding and the market is returning to rationale," Yin Yue, an analyst at Yuekai Securities in Shanghai, wrote in a report. "Investors can watch low-valuation cyclical sectors. Banks, insurance companies and brokerages are all cheap in valuation and have the chance to play the catch-up."

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Chinese onshore stocks were among the biggest winners earlier this year before their recent wobble.

While ChiNext's 41 per cent rally this year is still the year's best performer among major onshore stock barometers, Yuekai and Chasing Securities said it would be timely to rotate bets into cheaper, larger companies to avoid regulatory and valuation risks plaguing smaller companies.

This week's sell-off was also sparked by concerns that China's central bank will phase out the ultra-loose monetary policies, as the economic recovery in Asia's largest economy gains traction. Unprecedented amounts of liquidity unleashed by the People's Bank of China to counter the coronavirus impact have helped fuel dizzying valuation among small-cap companies. The price-to-earnings multiple of ChiNext entities stood at 57.2 times, or four times more expensive than members of the Shanghai Composite Index.

Shenzhen Stock Exchange suspends three companies as loosened trading rules fuel wild gains on ChiNext tech board

Baoding Lucky Innovative Materials, Shijiazhuang Tonhe Electronic Technologies and Shengtak New Material were among the biggest decliners on the ChiNext board this week, slumping by at least 31 per cent.

Shares of Xinjiang Tianshan, a cow-farming company at the centre of the Shenzhen regulatory clampdown, have been suspended since Wednesday after surging almost six folds in the past three weeks. It rejected allegations its ultimate controlling owner ramped up the stock price through illegal margin financing.

Low-valuation financial stocks have more safety margins, as the selling pressure on smaller companies has been building up, according to Luo Kun, analyst at Chasing Securities.

"Technology growth stocks need to digest their high valuation in the short term," said Luo. "From the perspective of more balanced allocations, low-valuation stocks such as cyclical and financial ones have more safety margins."

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